Inflation Surge Sparks Concerns as Fed Mulls Rate Hike

Wall Street opened lower on Thursday as hotter-than-expected September inflation data reinforced expectations of a 25-basis-point rate hike by the Federal Reserve at its upcoming meeting. The closely watched Consumer Price Index rose 0.2% on a monthly basis and 2.4% on an annual basis, with both figures being slightly higher than estimated by economists.

Inflation Concerns Rattle Markets, Clouding Fed's Policy Path

Inflation Data Exceeds Expectations

The September inflation data revealed that the Consumer Price Index (CPI) rose 0.2% on a monthly basis and 2.4% on an annual basis, surpassing the estimates of economists polled by Reuters. The core figure, which excludes volatile food and energy prices, rose 3.3% year-over-year, significantly higher than the estimated 2.3%. This unexpected surge in inflation has sparked concerns among investors and policymakers alike, as it suggests that inflationary pressures in the economy may be more persistent than previously thought.

Market Reaction and Implications

The hotter-than-expected inflation data had an immediate impact on the financial markets. The Dow Jones Industrial Average fell 75.96 points, or 0.18%, to 42,433.87, while the S&P 500 lost 15.88 points, or 0.27%, to 5,776.16 and the Nasdaq Composite lost 69.40 points, or 0.38%, to 18,222.22. The Russell 2000, which tracks economically sensitive small-cap stocks, also lost 1.09%. Rate-sensitive sectors, such as Real Estate and Information Technology, were particularly hard hit, declining 0.6% and 0.5%, respectively.

Shifting Expectations for Fed Policy

The inflation data has also led to a shift in market expectations for the Federal Reserve's monetary policy. After the release of the inflation figures, traders firmed bets on a 25-basis-point rate cut in November at 86.9%, with a 13.1% chance of no change at all, according to CME's FedWatch. This suggests that investors are now less confident in the Fed's ability to deliver the full extent of its expected interest-rate cuts, as the central bank may need to maintain a more hawkish stance to combat persistent inflationary pressures.

Conflicting Economic Signals

The inflation data was not the only economic indicator that caught the market's attention. Weekly jobless claims also rose to 258,000 for the week ending Oct. 5, versus an estimate of 230,000. This conflicting data, with inflation exceeding expectations and jobless claims rising, has created a confusing message for markets, according to Cameron Dawson, chief investment officer at NewEdge Wealth. "Whether or not that means the Fed is going to be able to deliver the full extent of its expected interest-rate cuts is a good question," Dawson said.

Sector Impacts and Individual Movers

The market's reaction to the inflation data was not uniform across all sectors. Delta Air Lines (NYSE:DAL) lost 2.1% after forecasting quarterly revenue below expectations in anticipation of slower travel spending. Other airlines, such as United Airlines, American Airlines (NASDAQ:AAL), and Southwest Airlines (NYSE:LUV), also lost ground, with declines ranging from 1.4% to 2%. Meanwhile, shares of Pfizer (NYSE:PFE) fell 2.4% as former executives distanced themselves from activist investor Starboard's campaign against the drugmaker.

Earnings Season and Fed Speakers in Focus

Investors are also closely monitoring the start of the third-quarter earnings season, with major banks scheduled to report results on Friday. The third-quarter earnings growth rate for the S&P 500 is estimated at 5% year-over-year, according to estimates compiled by LSEG. Additionally, comments from Fed officials Thomas Barkin and John Williams are expected later in the day, which could provide further insights into the central bank's policy stance.